Medbox, Inc. Announces SEC Investigation

On November 12, 2014, Medbox, Inc. (MDBX) put an end to nearly two weeks of speculation by acknowledging in its 10-Q for the period ended September 30 that the company has received a formal notice of investigation from the Securities and Exchange Commission (“SEC”). According to the quarterly report, on November 10, the SEC “notified the Company that it is conducting an investigation pertaining to the Company and issued a subpoena to the Company for documents from December 1, 2011 to the present relating to the matters it is reviewing.

According to the filing, the Company plans to cooperate fully with the SEC staff to complete the investigation on a timely basis.”

Medbox, a penny stock issuer whose stock once briefly traded above $200 a share, has been controversial since it went public in a reverse merger transaction in 2011.

Medbox’s flagship product is known as Medbox; it’s a vending machine designed to sell cannabis-related products. Medbox is the brainchild of Vincent Mehdizadeh, company founder, long-time officer and chairman of the board. Mehdizadeh is also a convicted felon with an impressive rap sheet. Earlier this year, he stepped down as an officer and director, but continued to work for the company as a consultant.

An hour after the bell on the last Friday of October, the company filed a bombshell 8-K announcing that it had formed a “special board committee” to investigate “(i) a letter from a former Company employee to the Securities and Exchange Commission alleging wrongdoing by a former officer of the Company who is currently a consultant to the Company, and (ii) a federal grand jury document subpoena served in August 2014 on the Company’s accountants by the U.S. Department of Justice, to ascertain what implications, if any, the subpoena or the letter may have with respect to the Company.

The implications seemed obvious to most observers. The ex-employee whistleblower had apparently written to the SEC about Mehdizadeh. The disclosure of a grand jury investigation was more surprising.

On November 3, a press release was issued in the name of Medbox. It sought to “clarify” the recent 8-K, explaining about the disgruntled ex-employee. According to the author of the release, “Within the last few weeks, Medbox was awarded a judgment against this employee on his employment claims, which demanded $1.5 million in damages related to the Company’s alleged wrongdoing.” Mehdizadeh was quoted as saying the former employee had “vowed to retaliate against the Company.”

No judgment against a former employee, or any litigation involving one, is mentioned in the company’s recent 10-Q, or in any other SEC filing including in its financial statement disclosures. Additionally, the Company has not filed a copy of the purported employee demand as an exhibit to its reports or filings with the SEC.

At the end of the press release, unnamed “current management” noted that “the Company has not found any indications that the subject matter contained in the letter is true concerning the conduct of prior officers of the company.” The release closed with another quote from Mehdizadeh, assuring the public that Medbox would “continue to be the gold-standard for accountability.”

On November 4, TheStreet.com’s Bill Meagher published an article titled “The Feds are Probing Los Angeles Pot Dispensary Outfit Medbox.” Retaliation was swift. Meagher was asked to change the title, and some of the content of the piece, and agreed to do so. Only the altered version survives, with the original date of publication. Mehdizadeh wasn’t finished: on the 6th, he issued a press release under his own name. In it, he said, among other things, that “Medbox’s corporate attorney demanded a retraction from thestreet.com and thedeal.com for reporting false information; Majority shareholder confirms Medbox is not under any SEC investigation.”

It soon became clear that there were internal disagreements at Medbox. On November 7, the company filed another 8-K, in which it said briefly, “The news release issued Monday, November 3, 2014 under the headline “Medbox Comments on Recent 8-K Filing” was not authorized by Medbox, Inc. (the “Company”) for distribution. The 8-K filed by the Company on Friday, October 31, 2014, should be used as a reference for information regarding this matter. The filing is available on the website of the Securities and Exchange Commission.” The new 8-K was signed by Douglas Mitchell, the CFO.

The inescapable conclusion is that the press release of November 3 was written and disseminated by Mehdizadeh alone. Mitchell did not discuss the news put out by Mehdizadeh personally, despite its discussion of actions supposedly taken by the company.

Efforts at damage control were soon trumped by Medbox management’s acknowledgment of the SEC investigation. Presumably the agency has decided against a trading suspension at this time; notices of a formal investigation usually come after, not before, suspensions. Interested observers await the next move, if any, from the SEC or the DOJ, which initiated the grand jury investigation.

Medbox’s new CEO, Guy Marsala, held a company conference call at 4:30 p.m. on November 12. The subject was the new financial report, but at the time the call began, the quarterly had not yet been filed; that did not happen until 4:48. Marsala chose not to address the events described in recent 8-Ks, and said not a word about the SEC investigation.

For further information about this article, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202N, Boca Raton, Florida, (561) 416-8956, [email protected] or visit www.securitieslawyer101.com. This memorandum is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.